Rights-issue activity has been low since the first half of 2011. Only $27 billion of equity capital has been issued across EMEA in the last four quarters – and just shy of $10 billion of that was from the UniCredit rights issue completed in January.
For context, $29 billion was issued in Q2 2011 alone – go to Q2 2009 and it was $55 billion. The status-quo cannot continue along these lines. Banks in Europe are over-leveraged and under-capitalized. Under pressure to raise their capital ratios but unwilling to go to the equity capital markets (ECM) at stock prices well below book value, bank managements have chosen instead to shed assets, buy back capital instruments below par and sell businesses.
It’s now dawning on regulators that insisting banks improve their ratios has backfired and become a pro-cyclical driver of further deleveraging inimical to their economies. They want banks to raise capital. Will investors provide it?
One ECM banker tells Euromoney: “You have to question whether banks are an investable asset class right now, given all the economic and regulatory uncertainties that make it almost impossible to model returns. But investors are very under-weight banks and presumably, at some stage, they will snap back into being investable.” The question is when.
“I'm sure we'll see bank issuance from the periphery before year-end,” says Rupert Hume-Kendall, chairman of global capital
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| Rupert Hume-Kendall |
markets at Bank of America Merrill Lynch (BAML), at a presentation on Wednesday on the outlook for the ECM business for the rest of 2012.
“The market being challenging doesn’t remove the need for equity, and Europe is fundamentally under-capitalized, and that’s why we're here.”
It’s fighting talk from a firm that has played lead roles in many of the biggest bank equity deals since the crisis. It’s questionable how successful a rights issue from the eurozone’s periphery could be this year. The rights issue from UniCredit sets a mixed precedent: while the deal worked out in the end, the bank’s share price almost halved after the announcement of terms in January.
It turned out that leveraged owners of UniCredit shares could not finance take up of the rights, and started selling. Across four days in January, the share price fell 40%, coming uncomfortably close to the hard underwriting price.
However, BAML found buyers and the share price recovered. It wasn’t much fun, though, for the bank on the hook for the deal. Does any underwriter want to go through that again?
“Let’s not forget market conditions last October weren’t great either,” says Hume-Kendall. “If UniCredit were coming to market now, we would absolutely underwrite the transaction. Like every decision of this type, it would be carefully considered but we would be there, you can be 100% certain.”
The deal didn’t seem to inspire confidence in UniCredit’s fellow peripheral banks – there has only been two other FIG rights issues from the periphery since; from Portugal’s BES and Spain’s Banco Sabadell.
Craig Coben, BAML’s head of EMEA equity capital markets, says: “It has to be on a case-by-case basis, but there could be appetite for a peripheral issue, and it might be something that we’d be interested in underwriting.”
The sales pitch isn’t great: banks need capital to absorb losses from exiting unwanted assets. And banks might not have the luxury of waiting until the time is ripe for success. Coben sums it up pithily: “We have capitalism with too little capital.”